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Implicit Cost of Demand and Financial Intermediation

A financial intermediation has estimated the following annual costs for its demand deposits: management cost per account = $140, average account size = $1,500, average number of checks processed per account per month = 75, cost of clearing a check = $0.10, fees charged to customer per check = $0.05, and average fee charged per customer per month = $8

a) What is the implicit cost of demand deposits for the financial intermediation?

b) If the financial intermediation has to keep an average of 8% of demand deposits as required reserves with the Fed, what is the implicit interest cost of demand deposits for the financial intermediation?

c) What should be the check clearing fees to reduce the implicit interest cost to 3%? Ignore the reserve requirements.

Solution Summary

This solution contains step-by-step calculations and brief explanations to determine the implicit cost of demand deposits, after financial intermediation and check clearing fees to reduce implicit interest. All workings and formulas are shown.

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